Closing a limited company: how to wind up your business

A limited company (Ltd.) is usually founded and then exists for an unlimited time. But sometimes life doesn’t go as planned and the company needs to be closed (also known as ‘dissolved’). There are various reasons that can lead to this; economic failure isn’t always the reason. The company owner may vol­un­tar­ily decide to dissolve the company, or Companies House may have made the decision if the business failed to pay taxes. In order to close a limited company, there are a few steps that need to be taken; you can’t just quit doing business. It can be a complex process, but an Ltd. must formally terminate. If you don’t com­pletely cancel the business, it will still be liable for taxes and annual reports and can also still be sued.

The decision to dissolve a limited company is not always of the founder’s free will. Economic reasons, but also legal or personal cir­cum­stances may require the company to close down. Here are some possible reasons:

• Low cash flow
• Mis­man­age­ment
• Negligent ac­count­ing practices
• Bank­ruptcy
• Defective products
• Partner dis­agree­ments
• Suc­ces­sion-planning failure

Other reasons could be that the owners think a different legal form would perhaps prove to be more suitable for achieving the company’s ob­ject­ives or maybe the share­hold­ers want the business to go in a different direction i.e. have a different business purpose. A dis­sol­u­tion may be:

Judicial: A court can dissolve a business for failure to comply with UK reg­u­la­tions or failure to pay tax. More common, however, is judicial dis­sol­u­tion as a result of a lawsuit brought by dis­gruntled Ltd. members who wish to unravel their business ties. A com­puls­ory li­quid­a­tion can be issued if a company owes you more than £750 and can prove that the company cannot afford to pay you.

Ad­min­is­trat­ive: Imposed by Companies House and usually the result of failing to either comply with UK reg­u­la­tions or file annual returns.

Voluntary: The result of members willingly choosing to close their business. This can happen in two ways. First, members can determine certain dis­sol­u­tion-triggers (such as the death of a member), in writing when forming the Ltd. Second, members can cast a vote to dissolve the company at any time.

As long as the company’s directors agree, the procedure for closure can begin. The process can go one of two ways depending on whether the company can pay its bills or not. If the bills can be paid (solvent), you need to apply to get the company struck off the Companies House register (a more detailed ex­plan­a­tion follows). This is usually the cheapest way to close the limited company.

To close/dissolve a limited company, the directors simply need to fill out the DS01 form as well as paying £10 to Companies House (note that you can’t pay with a cheque from the company that is about to close).

This, however, isn’t the case if the company is to be dissolved by Companies House itself. This could be due to not having a director ap­point­ment in place or because the company has failed to file annual returns and/or accounts.

The form must be signed by all the directors and sent to Companies House in Edinburgh, Cardiff, or Belfast, depending on where the company was re­gistered. If everything’s ok with the form, the local Gazette (the official newspaper record in the UK) will publish your request in their London, Edinburgh, or Belfast edition. As long as no-one objects during the 2 month notice period, the closure can go ahead.

Once the company has been closed, it will stay on the Companies House register and be marked as “dissolved”. It will stay this way for 20 years, then won’t be visible anymore. The reason for the two-decade stay is to make sure that the company is no longer needed.

There is, however, a way to make your company disappear off the register sooner, but not every company is ap­plic­able for this and The Companies Act 2006 is the body that gets to decide this.

• If the directors want to retire and no-one else will take over the business
• If the company is a sub­si­di­ary and the name is no longer needed
• If the company was ori­gin­ally founded for an idea that didn’t work out

Companies that are dormant or have ceased training can be struck off. The good news is that you’re rarely charged any late filing penalties unless you decide you want the company back on the register at a later point.

The company shouldn’t apply to be struck off if any of the following has happened in the last three months:

• The company has traded or continued business
• The company has changed its name
• The company has done any other activity

The other option is to liquidate the company, but one of the following must also apply:

• You plan on retiring
• You want to step down from the family business and no-one wants to take over
• You simply don’t want to run the business anymore

You’re required to pass a res­ol­u­tion for members’ voluntary li­quid­a­tion, which involves either making a “De­clar­a­tion of solvency” (for companies in England and Wales) or getting hold of form 4.25 from the in­solv­ency service Ac­count­ant in Bank­ruptcy (for companies in Scotland). For the De­clar­a­tion of Solvency, you need to review your company’s assets and li­ab­il­it­ies and write a statement saying that the directors have assessed the company and are quite certain that it can pay off its debts. As well as including the usual in­form­a­tion such as the company’s name and address and the director’s name and address, you need to say how long it will take to pay off the debts – this must be within 12 months from when the company is li­quid­ated.

The de­clar­a­tion (for England/Wales) or the form (for Scotland) must be signed by the majority of directors with a solicitor or “notary public” present. A meeting with share­hold­ers needs to take place within the next 5 weeks so that a res­ol­u­tion for voluntary winding up can be passed. It’s a good idea to hire an in­solv­ency prac­ti­tion­er to be present at the meeting so they can be in charge of winding up the company. The next step is to advertise with The Gazette newspaper within 2 weeks.

The signed de­clar­a­tion should be sent to the relevant Companies House or form 4.25 should be sent to the Ac­count­ant in Bank­ruptcy (depending on where the business is re­gistered) within 15 days of passing the res­ol­u­tion.

If your company is classed as “insolvent”, it means it’s unable to pay off the debts it owes. The creditors (the ones needing to be paid) must receive their money before any is dis­trib­uted to share­hold­ers or directors.

The company must follow the same li­quid­a­tion procedure as a solvent company would follow (explained above). If the company fails to pay its creditors, it will be forced into com­puls­ory li­quid­a­tion. This entails the creditors (the people the company owes money to) applying to court to get their money. This is done by either getting a court judgement or making an official request for payment (known as a “statutory demand”).

In order to respond, you must do one of the following:

• Pay off the debt
• Agree with the creditor to pay the debt at a later date (e.g. with a company voluntary ar­range­ment (CVA), which allows you to pay the money back over a certain time)
• Put your company into ad­min­is­tra­tion, meaning you’re protected from legal action and don’t have to pay your debts in full
• Apply to liquidate your company yourself
• Protest the court judgment if you do not owe the money or didn’t receive nor respond to the claim from the court about the money owed

You must respond with one of these options within 14 days otherwise the creditors can request to have your assets taken away by bailiffs.

There are several ways in which you can respond to a statutory demand:

• Pay off the debt
• Agree with the creditor to pay the money off at a later point (e.g. using a company voluntary ar­range­ment)
• Put your business into ad­min­is­tra­tion
• Apply to liquidate your company yourself

If you don’t respond within 21 days, your creditors have the right to liquidate your company.

You don’t of­fi­cially have to close your company if it’s no longer trading. By letting the business become dormant, it mean it’s exempt from paying taxes. This is only an option if your company isn’t:

• Con­tinu­ing its business activity
• Trading
• Receiving income

You can keep the company dormant for as long as you wish, but it will still be re­gistered at Companies House.

Please note the legal dis­claim­er relating to this article.